Unlike sole traders, limited companies are incorporated as separate legal entities away from their owners and thus exist in their own right.
Setting up a limited company is a pretty straightforward affair and despite a plethora of formation agents on the web offering to do this for you (at a not insignificant cost), its something most of us can do quickly and easily and for little expense.
Having first of all decided that you want to set up a limited company the first thing to do is to head over to the Companies House website which is at https://www.gov.uk/limited-company-formation/register-your-company. Once there, click the “register now” button and it will take you through the process of setting up your company.
As you go through the process, Companies House will make a few checks on the information you submit so its useful to have thought about some of the questions you will need to answer up front.
The process starts with the setting upon a Government Gateway for your company (different to any Government Gateway account you may have for yourself). It’s important that you retain all the details of your Government Gateway (login and password) as you will need these later to set up services like Corporation Tax, Vat and PAYE for your company.
The first question you will be asked is whether you are setting up a company limited by shares or limited by guarantee. Whilst both types of company offer limited liability, in a company limited by shares, shareholders liability is limited to the amount of share capital they subscribe for (usually a nominal sum) whereas in a company limited by guarantee, the owners provide a guarantee of a “guaranteed” amount. If you are running a small business, you will be setting up a company limited by shares as companies limited by guarantee must reinvest their profits back into the company and are therefore usually set up for charitable purposes.
You will next need to decide upon a name for your company. You company name needs to be unique (so as not to confuse it with another business) and Companies House will normally check this (there and then) to make sure no one else has the same or very similar name. It is worth knowing that as a business, you do not necessarily have to trade under the same name as the name of your limited company – so for example, if you run a business called “Acme Construction”, you may find that you won’t be able to register a company called Acme Construction Ltd (because someone else has done so before you). However you can quite reasonable register your company as (say) “your name limited” and on your invoices (usually in the small print) point out that Acme Construction is the trading name of your company Ltd.
You can then proceed to tell Companies House who the shareholders will be and who the directors will be (also referred to as the officers of the company). When setting up the shareholdings for your company, most people will be issuing ordinary shares of a single class (we’ll talk about share classes a little later). Shares are ascribed a nominal value which can be any amount you wish it to be (even as little as 1p). Although in theory your company only needs to have a single share with one owner and could therefore have a share capital of as little as 1p, in practice it makes sense to issue at least 10 or even 100 shares at the outset so that if in the future you wanted to split ownership of the business with someone else, you can easily do so by transferring or selling some of your shares to them (you can’t do this if you only have 1 share).
One of the important principles of company law is that all shareholders of a single class have to be treated the same by the Company. This means for example, that if a company declares a dividend of £x per share, ALL shareholders will be entitled to receive the same dividend. If therefore you are setting up a company with someone else and you would like to have different levels of dividend for each of you, you will need to set up a company with different share classes – so A shares, B shares, etc… (sometimes called alphabet shares). The standard Companies House setup described here doesn’t allow you to do this so if you wish to issue alphabet shares, you will need the help of a specialist formations agent.
Once the shareholdings have been set up, you will need to tell Companies House about “Persons with Significant Control” or PSC’s. A PSC is anyone who owns more than 25% of the shares or voting rights in a company or can otherwise appoint and remove the majority of the Board of Directors – they in essence have control of the business. If you are a small business with just 1 shareholder, you are by definition a PSC. If you have set up your company with 2 shareholders both owning 50% of the shares, then both shareholders are PSC’s.
Finally, when a company is registered, the shareholders will need to agree to a Memorandum of Association and adopt Articles of Association. The Memorandum is a legal statement signed by the initial shareholders agreeing to form a company whilst the Articles are the rules about running the company which they have all agreed to and therefore determine what the company can and cannot do. Companies House will usually allow you to adopt a standard Memorandum and Articles of Association when you form the Company and will attach a copy with the Certificate of Incorporation when it is sent to you (usually by email). It’s worth noting here that part of the reason why companies wanting to issue alphabet shares (mentioned above) cannot go through the Companies House process on-line, is because they will need non-standard articles of association which allow them to issue alphabet shares with different entitlements for each type of share.
Once the process is completed, there is a registration fee of £13 to pay and that’s it – your company is all set up and ready to go.
